Flexibility is the key for speculators

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

Shares remain in superb shape. The two-week, sideways drift in the averages is unofficially "the correction," the market's way of unwinding an overbought state that needed some cooling off of the speculative sentiment which underpins it.

That there has not been anything more than a 1.4% easing off the high in the Nasdaq says it better than anyone can. One can say all they want about how the country is broke and how the Federal Reserve created this bull market — correct on both counts — but the market does not care.

And neither should an intermediate-term speculator.

There is still a pessimism among investors who were harshly treated by two bear markets in the last decade. This may have the effect of extending this bull market, as increasing numbers throw in the towel and get in the water. This happened in the ‘90s until everyone was in the pool in March 2000.

Caution was in the air Monday ahead of the three events that produce the most volatility in the markets. It is uncommon that they should be stacked one against the other for three days in a row. They are Wednesday's FOMC meeting, Thursday's ISM report, and Friday's nonfarm-payroll report (NFP).

Many times it is the ISM number that provokes the bigger reaction during weeks in which the ISM precedes NFP. In any case, this will likely be one volatile week. Flexibility on the part of the speculator will be key.

Beneath the surface, the overarching development at the moment is a number of the speculative growth-stock glamours spiking and then printing inside, or quasi-inside, days. This is where some of the crème de la crème is, and the pause reflects caution ahead of the Wednesday-Friday trifecta.

One possible scenario is that these issues come out on Wednesday's FOMC announcement or Thursday's ISM release. They could come out Tuesday.

Among the names, the unexpected is often telling. That Facebook FB, +0.82%
on Monday was able to pack on a further gain of 4.2% on volume 176% above average, despite already being up 30% in a single session two days' prior, says something.

It says something further that it managed this move on a day in which the averages and most issues were down — not to mention ahead of the week's trifecta of events.

Why did this transpire? Don't know, don't care.

All that matters is that FB did the unexpected and showed power when it was entitled to a rest. It printed an inside day on Friday and then broke higher on Monday, a session in which most of the other glamours eased.

In 1999 or so, these reports began referring to FB's pattern as the "give-and-go." The idea is that a sharp move upward, when followed by a few days of tight, sideways action, would resolve itself with another break higher. An entry could then be made on a break of the ledge pattern, a consolidation consisting of four to 10 days.

In FB's case, there was only one day of pause (Friday) before more institutions began what appears to be a renewed buying campaign in the stock.

In any market, there are only so many liquid glamours that show expected earnings growth of a large magnitude. In the current cycle, this includes Tesla Motors TSLA, +0.08%LinkedIn US:LNKDNetflix NFLX, +0.46%
and Facebook. Google GOOG, +0.42%
which most analysts peg at an expected earnings growth rate of 9%/18% for '203 and '14, does not qualify.

Any institution with a growth-stock mandate "needs" to own these liquid glamours if they want to keep up with the averages in a bull market, let alone outperform. These names are deeply liquid and all showing at least 35% expected growth for 2013 and '14. This participant took FB Monday after it came out.

Entering FB right here at Monday's close of 35.43, and using Thursday's low of 32.75 would result in a 7.6% stop loss. This is considered extended if one were to use a full-sized position. If, however, a junior position was used initially, the de facto risk drops to about 3.8%. Worth considering around Monday's closing level for those aggressive speculators not in the issue.

3D Systems DDD, +0.69%
was noted here in the July 14 report ("A potential entrance above the May 31 high of 50.98 presents itself."). It cleared this level Monday on volume 117% above normal. The earnings release is expected pre-open Tuesday. (It is to be noted that the price behavior in advance of an earnings release may not always reflect the outcome of the report, let alone the market's reaction to the report. While the market is right most of the time, it is not right all of the time.)

At this point, DDD is worth watching but not acting on until after the report.

Sohu SOHU, -0.39%
was an example of the risk that is omnipresent when buying ahead of an earnings release. SOHU was noted here in Friday's column ("...may be interesting on a volume-backed breakout following its upcoming earnings release."). The stock actually cleared its base top prior to its release, then fell 10% Monday after the release came out.

Elsewhere, SolarCity's US:SCTY
high of July 15 at 44.98 can be used as a potential cheater entrance. Ocwen Financial OCN, +1.57%
is one of the names that printed an inside day Monday. A potential entrance would be above the July 26 high of 47.88. Under Armour UA, -1.62%
is another chart that has the same pattern.

The Nasdaq's up-and-tight behavior since this advance began five weeks ago normally correlates with richer quotations. Most glamours act well. An aggressive speculator should not be lulled into a sense of complacency. Flexibility should rule the day.

Only the paranoid survive.

Kevin Marder

Earnings estimate data provided by Thomson Reuters.

The views contained herein represent those of Marder Investment Advisors Corp. ("MIAC"). At the time of this writing, of the stocks mentioned in this report, Kevin Marder, MIAC, or an affiliate thereof held a position in FB, though positions are subject to change at any time and without notice. This information, which may have been previously disseminated, is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance of any security or strategy is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to MIAC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position.

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